Path to Equities….

Have you ever envied your friend for making that quick Buck in Equity shares? Have you ever wished to make returns more than your bank FDs? Once in our life time we all have encountered these questions. Most of us get tempted by the overnight multi return baggers stocks, and get into such stocks. Suddenly we find that we are left with our investments halfed .We swear to our self that we won’t invest in equity markets ever again. But equities are more than making just quick money .The value of our saving is getting diminished day by day by inflation. This makes it very essential that our investments yield returns over and above the rate of inflation. We have various financial commitments to be satisfied over our lifetime, and their cost is on upsurge. So this is where Equity Stocks returns take main stage. Equities are said to be the ultimate hedge against inflation. The average returns of the equity over long term period is around 13% -15 %( see graph).

Equity share are instrument whereby the investor gets an opportunity to participate in the affairs of the company and enjoy the share of profits (or losses) in the form of dividends and increase in share prices .There are many types of Equity shares, but we will limit our scope to the listed equity share on Stock exchanges.

There are different means by which an investor can get exposures to equity shares, some are enumerated below.

1. Direct trading through Share Brokers.
2. Equity oriented Mutual Funds.
3. Portfolio Management Services (PMS) Schemes
4. Unit Linked Insurance Plans (ULIPs) of insurance companies.

Here is a simple guide to Invest in equities.

1) Thumb rule: The basic thumb rule followed for deciding the portfolio allocation to the equities is the Age of the investor.The portfolio percentage exposure to equity should be 100 minus the age of the investor. For e.g. Mr. Wise is 45 years old; he should take an equity exposure of 100-45 =55, i.e. 55%.while calculating this percentage, exposure to equities through all instruments should be considered. This thumb rule is based on the logic of age and risk relationship. As your age increases the risk taking capabilities decreases.

2) Risk Element: Investment in equities entails certain risk. There is no guarantee of fixed returns and the capital may also get eroded to any percentage. Investor should be completely aware about the kind of the risk he is exposed to.

3) Mode of entry :It is suggest for the first time investor to invest in diversified equity Mutual Funds(MFs) to ride the equity returns, as the MFs are managed by experienced professionals and advantage of portfolio diversification can be taken. The well informed investors, who can comprehend the company prospects, can take help of the Stock brokers. Stock broking firms are always in competition to provide wide spectrum of value added services to their clients. They offer services like Portfolio Management Services, Life & General Insurance, Commodity trading, Mutual Funds, Forex trading etc.One may shortlist the most efficient & convenient Broker for his investments.

4) Stock selection: This is the most difficult part of investing in Equities. The basic rule one should remember here, is select companies which have shown consistent growth in profitability and sales. Ensure the company’s Management is in the hands of experienced professionals. One can also subscribe to an Initial Public Offer (IPO) of the companies and benefit from the growth of companies expanding with capital inflow.

5) Diversify: In case you have opted to invest in equities directly through a stock Broker. One shouldn’t be biased to particular sector or capitalization. Again, as the rule says, “You shouldn’t keep all your eggs in One Basket”. Diversification will help to reduce the risk concerning that particular sector or capitalization .The average return of investment will be preserved from sudden downside. The FMCG companies are considered as defensive stock, having less volatility in stock prices. Such defensive stock will act as return stabilizers to the equity portfolio.

6) Long term investing & Book Profits: While investing in Equities the investor should look at an investment horizon of more than 3-5 years, as sizeable returns can only be seen in long term investment in equities. During short term the equities can also show negative returns. Markets are never seen still, sometimes up and sometimes down, just like a roller coaster ride. One should keep in mind a fixed target returns which he is looking from his portfolio. Once these returns are achieved, he should exit from the stock. Don’t let the greed of earning more overcome you.

7) Don’t time the markets: Its always desirable to purchase stocks at low price and sell at highest high, its less possible one might get it right . Its advisable to purchase your target stocks at every downfall of prices and do not deploy total funds at one go. One can give a standing instruction to his broker to buy certain quantity of shares or certain value of shares periodically. This will ensure average of prices.

8) Do not panic: Stock markets depict the reactions of masses. It need not always true ,that masses would be right. Even when markets were scaling to 21000 levels no one talked about down fall. And surprisingly when markets reached 8000 levels people expected more downside. The best way when your portfolio is in Red, is to stop viewing it for a while.

9) Portfolio Review: One should take a review of the portfolio at regular intervals, taking into consideration the returns, company financials and corporate actions. It is a very important process as the underperforming stocks would be weeded out from the portfolio. This will help to maintain the average returns of the portfolio as decided. When a certain stock is sold as it has earned as decided returns or as it underperformed, proper diligence should be done for any new stocks added to portfolio.

Today , we have hundreds of news channels, making information explosions every second and analyst giving their extended views on Stocks and Markets .This has made the viewers more aware, but less knowledgeable. The investors should understand the rational on which the Equity experts recommend to Sell or Buy. There are the Bull phases and Bear phases in equity markets, one should learn how to survive in all phases. The attempt to overpower Bulls or Bears will not be profitable. There are “N” number factors affecting the Market directions, that aren’t possible for an individual investor to comprehend, so don’t shy away to take a professional help.